Fireworks Budget: Sparking Concerns Over High Government Borrowing Costs

by | Sep 23, 2022

Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown, has commented on today’s emergency budget.

“Kwasi Kwarteng has set off fireworks with this budget, which collides with the Bank of England’s efforts to dampen down inflation, while sparking a firestorm of criticism about benefiting the wealthy much more than the poorer sections of society. Scrapping the top rate of tax will return many thousands of pounds to high earners, while lifting the cap on bankers’ bonuses is likely to be hard to swallow for low paid workers on the picket lines, calling for pay rises to help them survive the cost of living crisis. Confidence in the UK economy has faded away further with sterling falling below $1.12.  

“The Truss administration wants to put a rocket under growth, but there is a risk that after a first boost, the policies could crash and burn, particularly if government borrowing costs soar further. There are signs that buyers of UK government bonds are becoming even more nervous about the government’s ‘splash the cash’ policies, given the mounting debt pile. With inflation set to head above 10%, the Bank of England has warned it will be more aggressive if necessary if the measures brought in by the Truss government inflame hot prices further. Gilt yields have risen again as the scale of the spending has become clear.

“Reversing the National Insurance rise, combined with scrapping the planned rise in corporation tax, scrapping the top level of tax and edging down the 20% threshold by 1 pence in the pound will mean that inflows into government coffers will be significantly reduced just at a time when they are being depleted to fund the energy price freeze.

“Keeping the headline rate of corporation tax lower is not likely to kick-start domestic company investment into automation or re-skilling.  The government has missed a trick not bringing in more targeted tax incentives and deductions. These would have helped boost UK productivity by equipping the UK workforce with the skills needed in the decades ahead, particularly due to labour shortages exacerbated by Brexit.

“The VAT cut is what businesses, particularly in the hospitality industry, had been crying out for to help see them through the energy and cost-of-living crises. But there was no help coming from this direction, instead pubs bars and restaurants had to make to promises that corporation tax and alcohol duty won’t rise instead. Whitbread, the owner of Premier Inn, J D Wetherspoon and The Restaurant Group have fallen back amid the disappointment that more targeted support was not available. They are left grappling with acute problems, such as big gaps in rotas, due to the exodus of staff.

“More than half of businesses (51%) in the hospitality sector say worker shortages remain a real concern. So even if their customers have more money in their pockets to spend, catering to that demand will remain a significant challenge. Anti-social hours of restaurant and bar work, are not an easy match for family life, so it is unlikely to attract parents who risk seeing benefits reduced for turning down potential work.

“Instead of supporting British businesses with a VAT cut, that benefit was reserved instead for foreign visitors with an aim to boost tourism, who will see what they buy exempt from VAT. The sector will already be experiencing the tailwinds of the weak pound, given that visitors from the US for example will see their dollar to 25% further than just a year ago.

“The enterprise zone concept introduced by David Cameron has been resuscitated as investment zones, with extra tax breaks to boot. The idea is that they will help deliver the levelling up agenda, but they will be uneven and potentially contentious ground. Offering tax breaks to one street or village, but not to the next is likely to lead to dissent at a local level, particularly if planning laws are relaxed to allow more developments on sacred green belts.

“House builders have been clad with a rosy glow on the markets today, after the stamp duty cut confirmation and the prospect of more acquiescent planning departments on the other. But these measures are not likely to help stave off a correction in prices indefinitely. There is the potential that changing the criteria for new developments, allowing companies to build fewer low-cost units, could push up overall house prices even further, with more high-end homes likely to be built. As rates rise further, and people find prices increasingly unaffordable, the market is still likely to stumble.

“The purse strings will be loosened further to fund a wish list of infrastructure projects. This come at a time when raw material prices have been highly volatile, and energy costs have stayed elevated, and workers are highly in demand. More than a third of companies (36%) in construction are still grappling with staff shortages, so the cost of labour could be pushed up further as new contracts are delivered.  Shares in infrastructure firms have had a muted reaction to this widely trailed policy, with investors questioning whether the pipeline of schemes could end up becoming blocked.”

  • Budget collides with the Bank of England’s inflation busting drive
  • It has prompted fresh jitters in the bond markets with the cost of government borrowing rising again.
  • Pound slips even further against the dollar as confidence in the UK keeps ebbing away
  • Rise in corporation tax scrapped instead of targeted incentives to boost productivity
  • Hospitality stocks fall amid disappointment little new support was offered
  • Muted response from listed construction companies as questions remain over infrastructure promises.
  • Enterprise zones set to lead to uneven levelling up and may spark local dissent
  • House builders lift on stamp duty promise, but it’s unlikely to stop a correction in prices

Find out more about Hargreaves Lansdown

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